Objective, impartial advice for Property Investors and Landlords with a focus on the Edinburgh area

Tuesday, 20 November 2018

Hard Brexit - How Would It Impact Edinburgh House Prices?

With all the current discussions about Brexit, more and
more the concept of a hard Brexit has been taking centre stage.

I am often being asked how a hard Brexit would affect the
Edinburgh property market so I am going to try and give you what I consider a
fair and unbiased piece on what would happen if a hard Brexit takes place in
March 2019.

After the weather and football, the British obsession on
the UK property market is without comparison to any other country in the world.
I swear The Daily Mail has the state of the country’s property market on its
standard weekly rotation of front-page stories! There are better economic
indexes and statistics to judge the economy (and more importantly) the property
market. The number of transactions are just as important, if not more, as an
indicator of the state of the property market.

Worries that a ‘Yes’ vote in the Brexit referendum would
lead to a fast crash in Edinburgh (and national) property values were unfounded.Now, it’s true the Edinburgh property market has
see both a slower increase in the number of people moving and property values in
2017 and 2018 year to date compared to the heady days of a few years but, before
we all start panicking, let’s ask ourselves, what exactly has happened in the
last couple of years since the Brexit vote?

Edinburgh
house prices have risen by 15.54% since the EU Referendum…

…and yes, in 2018 we are on
track (and again this is projected) to finish on 12,700 property transactions
(i.e. the number of people selling their home) … which is slightly more than
2017 … and higher still than the long term 10 year average of 10,095
transactions in the local council area.

So, it appears the EU vote
hasn’t caused many major issues so far.However, if there was a large economic jolt then that could be a
different game but how likely is that?

The property market is mostly influenced by
interest rates and salaries.

A hard Brexit would subdue wage growth to some degree,
yet the level of the change will depend on the undetermined type of Brexit deal
(or no deal). If trade barriers are imposed on a hard Brexit, imports will
become more expensive, inflation will rise and growth will fall, although at
least we are not in the Euro, meaning this could be tempered by the exchange
rate of the Pound against the Euro. In plain language, a hard Brexit will be
worse for house prices than a deal.

So
why did the Governor of the Bank of England suggest a disorderly hard Brexit
would affect house prices by up to 35%?

I mean it was only nine years ago we went through the
global financial crisis with the credit crunch. In Edinburgh property prices
dropped by 6.1% over a year or two. If we had a similar percentage drop, it
would only take us back to the property value levels we were achieving in the
summer of 2017.

And let’s not forget that the Bank of England introduced
some measures to ensure we didn’t have another bubble in any future property
market. One of the biggest factors of the 2009 property crash was the level of
irresponsible lending by the banks. The Bank of England Mortgage Market Review
of 2014 forced Banks to lend on how much borrowers had left after regular
expenditure, rather than on their income. Income multipliers that were 8 or 9
times income pre-credit crunch were significantly curtailed (meaning a Bank
could only offer a small number of residential mortgages above 4.5 times
income), and that Banks had to assess whether the borrower could afford the
mortgage if interest rates at the time of lending rose by three percentage
points over the first five years of the loan … meaning all the major possible
stumbling blocks have been mostly weeded out of the system.

So,
what next?

A lot of Edinburgh homeowners might wait until 2019 to
move, meaning less choice for buyers, especially in the desirable areas of Edinburgh.
For Edinburgh landlords, Edinburgh tenants are also likely to hang off moving
until next year, although I suspect (as we had this on the run up to the 2015
General Election when it was thought Labour might get into Government), during
the lull, there could be some Edinburgh buy to let bargains to be had from
people having to move (Brexit or No Brexit) or the usual panic selling at times
of uncertainty.

Brexit, No Brexit, Hard Brexit … in the whole scheme of
things, it will be another footnote to history in a decade. We have survived
the Oil Crisis, 20%+ Hyperinflation in the 1970’s, Mass Unemployment in the
1980s, Interest Rates of 15% in 1990’s, the Global Financial Crash in 2009 …
whatever happens, happens. People still need houses and a roof over their head.
If property values drop, it is only a paper drop in value … because you lose
when you actually sell. Long term, we aren’t building enough homes, and so, as
I always say, property is a long game no matter what happens – the property
market will always come good.

Growth in UK property values as well as in Edinburgh seems
fated to slow over the next five to ten years, whatever sort of Brexit takes
place.

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This blog follows the buy to let market in Edinburgh. You'll find tips, guidance, and analysis that relates specifically to Edinburgh and you'll also find properties from all the estate agents in the city on here that may make decent investments. Views expressed are those of the author only.

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Robert Young

Robert Young is the author of this blog.

Robert and his team operate The Key Place and if you're thinking of buying a property to let in Edinburgh, we'll be happy to advise or just offer a second opinion. We can be contacted on robert@thekeyplace.co.uk, or 0131 603 4570.